This article has been written by Abhishek Nair, pursuing the Diploma Programme in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
Table of Contents
Introduction
The Competition Commission of India established by the Competition Act 2002 (Competition Act), works as the competition regulator in India. The objective of the Commission as well as the laws is to promote competition and private enterprises at the same time by barring anti-competitive agreements, regulating the powers of dominant position by enterprises, and regulating combinations in India which may cause or likely to cause an Appreciable Adverse Effect on Competition (AAEC) within India. “The main objective of competition law is to promote economic efficiency using competition as one of the means of assisting the creation of market responsive to consumer preferences.”
It is in this spirit of competition that mergers and acquisitions are regulated as they are immensely beneficial to the growth of the economy and have to be approved by the Competition Commission of India (“CCI”). This process though is not favorable as it is both tedious and time-consuming, which makes this entire process harrowing especially for those transactions which will not have any appreciable adverse impact on competition in India which led to India being an unfavorable market for Mergers and Acquisitions. The Competition Act along with the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations 2011 (Combination Regulations) regulate the merger control regime in India. Section 5 of the Act defines combinations as transactions that meet certain thresholds which are revised from time to time. Section 6 prohibits combinations that cause an appreciable adverse effect on competition and declares these to be void.
As part of its ongoing and regular efforts to make M&A filings approval faster, the CCI had in the 2019 Amendment Regulations notified about the “green channel” mechanism for certain kinds of M&A transactions. The parties are simply required to file a short-form merger notification or Form I along with the declaration specified in Schedule IV under the green channel mechanism in a prescribed format to enable deeper scrutiny and assessment of the combination by the Commission. The concerned M&A transactions will be deemed automatically approved upon the CCI’s acknowledgment of the receipt of such notification.
Green channel mechanism
Before the Amendment, as per Section 5 of the Competition Act, 2002 the enterprises which proposed to enter into combinations had to notify the CCI before entering into such combinations. After receiving the notification, the CCI has to analyze the impact of the combination within 210 days before which the proposing parties cannot execute the proposed combination. The combination is approved only if no appreciable adverse effect is caused or is likely to be caused by the combination contravening which CCI will either approve with modifications or reject the combination as a whole.
In 2019, The Competition Law Review Committee Report suggested that the combinations which are improbable to cause an AAEC should be green-channeled, and as such the Combination Regulations were amended by affecting the Regulation 5A within Schedule III of the Combinations Regulations, 2011 providing for Green Channel mechanism was allowed for the green-channeling of mergers with no vertical or horizontal overlap, the rationale for which was based on the existing high approval rate of mergers by the Competition Commission of India (CCI). notified for certain combinations.
Qualifying criteria
The criteria for availing of the Green Channel mechanism have been provided under Schedule III to the Combination Regulations.
The parties to the combination, their respective group entities and/or entity in which they, directly or indirectly, hold shares and/or control:
- do not produce/provide similar or identical or substitutable products or services;
- are not engaged in any activity relating to production, supply, distribution, storage, sale, and service or trade-in products or provision of services which are at different stages or levels of the production chain; and
- are not engaged in any activity relating to production, supply, distribution, storage, sale, and service, or trade-in products or provision of services that are complementary to each other.
Procedure
If the combination falls under the standards mentioned above then the following procedure can be opted by the parties:
Firstly, a Form I (given in Schedule II) as per Regulation 5 of the Combination Regulations has to be filed as notice with the CCI.
Secondly, along with the notice, a declaration as per Schedule IV of the Combination Regulations has to be filed. It is a declaration affirming that the combination falls under the Green Channel and that it is not going to “is not likely to cause any adverse effect on competition”.
Thirdly, a summary of the combination in about 1000 words has to be submitted to the CCI as well. It will consist of the name of the parties; nature and purpose of the combination; products, services, and business of the parties, and the respective markets of the parties.
Upon filing these documents, the combination will be deemed to be approved by the CCI under Section 31(1) of the Competition Act by an ‘acknowledgment’ (usually on the same day) which serves as the ‘deemed approval’ of the CCI.
Pre-filing guidance (non-binding on CCI) can be obtained from the case team in CCI to clear ambiguities before filing the notice in Form I.
Penalty
The Indian merger control regime is mandatory and suspensory. Thus, if any party consummates a notifiable transaction, in full or in part, before the approval of the CCI, it would tantamount to “gun-jumping”. Where the CCI finds that the green-channeled combination does not fall under Schedule III or if it is found that the information submitted is incorrect or that there exist any horizontal or vertical overlaps in the proposed combination, the notice given by the parties and the approval granted by the CCI shall be declared void ab initio and the combination shall then be dealt with by the provisions of the Act. The CCI will deal with such combinations under Section 44 and Section 20(1) of the Competition Act and if found to be contravening the provisions of the Act, a penalty which shall not be less than rupees fifty lakh but which may extend to rupees one crore, as may be determined by the Commission shall be imposed on the parties. An opportunity of hearing will be given to the parties to prove that the combination falls under Schedule III and the declaration is not incorrect.
BAC’s acquisition of Essel Mutual Fund (Essel MF)
The Competition Commission of India (CCI) had received their first green channel route combination for the acquisition of Essel Mutual Fund by BAC Acquisitions, a Sachin Bansal-owned entity. There was no horizontal or vertical overlap as the target company is involved with the business of mutual funds, completely different from that of the acquirer. They gave the declaration that the proposed combination between Essel Mutual Fund and BAC Acquisitions raised no risk of any adverse effect on competition and that it was submitted under the ‘green channel’ route as the Parties did not have Overlaps, Vertical Overlaps, or Complementary businesses.
Conclusion
The Green channel is an automatic route for approval of combinations which will reduce time and costs of transactions significantly which will allow the CCI to continue its role in monitoring notifiable combinations which may pose genuine competition concerns without being overburdened by those cases which are prima facie do not have any adverse effect on competition. The mechanism will also allow businesses in India to combine with minimal regulatory compliance and will aid the country to reach a global standing in the field of mergers and acquisitions. While this system is still not perfect as it is, the absence of a time limit within which the commission can deem the transaction to be void ab initio increases the transaction cost and leads to uncertainty which is not suitable for the market as the parties may need to start the entire transaction afresh.
It also creates stress on the primary goal of increasing ease of access to doing business by making the parties have an additional burden of intensive due diligence. Furthermore, there needs to be an involvement in the terms used for qualifying criteria as due to the criteria being vague, even a small overlap will render both parties unable to utilize the Green Channel route. This aligns with the lack of proper precedent usage of words like “Alternative Markets” and “Complementary”. Complementary goods have never been defined by the CCI nor interpreted by the courts in the context of Competition Law. While it can be interpreted in the context of Intellectual Property Rights and economics, the Indian Courts, as well as the Competition, need to give better clarity into the exact formula for calculating this rather than making it ambiguous. Nevertheless, it is certainly a great tool in promoting the M & A field in India and must be appreciated and only evolved, not rolled back.
References
- Hansaja Pandya & Hrithik Khurana, Green Channel Mechanism Under the Indian Competition Law Regime, https://lexinsight.files.wordpress.com/2020/08/green-channel-mechanism-under-the-indian-competition-law-regime.pdf.
- CCI’s green channel amendments one step forward and two steps back, http://www.nishithdesai.com/information/news-storage/news-details/article/ccis-green-channel-amendments-one-step-forward-and-two-steps-back.html
- M. P. Ram Mohan and Vishakha Raj, Merger control for IRPs: Do acquisitions of distressed firms warrant competition scrutiny ? https://ibbi.gov.in/uploads/publication/dc195510e9141a689e41ad181ab66cea.pdf.
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